As contract cases go, this one is interesting. It’s more than interesting, it’s awesome! The court held that an instant message exchange effectively modified a written agreement which contained a “no-oral modification clause.” This resulted in a judgment in favor of a marketing agency against the seller of electronic cigarettes to the tune of $1,235,655 (along with fees, costs, and interest)!

Smoking Everywhere sells e-cigarettes through its website. It contracted with CX Digital, which ran an affiliate marketing network. CX’s affiliates run websites or campaigns and, when they refer a sale to CX’s clients, CX is paid a referral fee by the client (and CX pays a portion to its affiliates). Smoking Everywhere and CX signed an insertion order under which CX would get paid $45 per “sale” of “Gold E-Cigarette Kit Free-Trials.” Sale was specifically defined as filling out a one page registration form and submitting credit card information. The insertion order contained a limit of 200 sales per day.

The parties signed the insertion order in August 2009. In August, CX generated 670 sales. It invoiced Smoking Everywhere $25,150 for these sales. It was never paid for this invoice. In early September, the parties have an instant message conversation which covered a variety of topics. CX asks Smoking about removing the 200 sale per day limit:

[CX] (2:50:08 PM): We can do 2000 orders/day by Friday if I have your blessing

[CX] (2:52:13 PM): those 2000 leads are going to be generated by our best affiliate and he’s legit

[Smoking Everywhere]: is available (3:42:42): I am away from my computer right now

[CX] (4:07:57 PM): And I want the AOR when we make your offer #1 on the network

[Smoking Everywhere] (4:43:09 PM): NO LIMIT

[CX] (4:43:21 PM): awesome!

In September, CX’s referrals went through the roof and it was referring an average of 1,244 sales per day. The parties had some discussions and quibbles about whether CX was referring potential sales to the correct version of Smoking Everywhere’s landing page. (Apparently, an older version of the site promoted e-cigarettes as a smoking cessation device as recommended by doctors, and Smoking Everywhere changed this practice. The written agreement referred to the old version of the site.) Smoking Everywhere did not pay the August invoice, and CX put the Smoking Everywhere campaign on hold. When Smoking Everywhere declined to pay CX’s August and September invoices, CX sued. Following a bench trial, the court rules for CX.

Modification of the Agreement: One of the key issues was whether CX could invoice Smoking Everywhere for the multitude of referrals, despite the 200 sales per day limit in the insertion order. The other issue was whether CX was entitled to the referral fees despite sending referrals to a link other than the one listed in the insertion order. There was a final issue as to whether the sales were fraudulently procured.

The issue of fraudulent sales: Smoking Everywhere tried to argue that many of the sales were “fraudulent,” but the insertion order contained language that was favorable to CX on this point. Smoking Everywhere would be relieved of its obligation to pay for sales only if it provided documentation “beyond a reasonable doubt” within five days of the sale, with time being “of the essence.” Smoking Everywhere failed to procure this evidence so it lost its fraud argument.

Whether traffic was sent to the correct link: On the issue of whether the traffic was sent to the appropriate link, the court says that the instant message conversation clearly demonstrated an intent to agree on a different link:

A close reading of the instant messages and careful consideration of the behavior of the parties during the conversation indicate clear assent on the part of both parties to stop sending traffic to the ‘old’ ecig link and to begin sending the traffic to the two new URLs.

The representatives of Smoking Everywhere and CX exchanged links (via email) that went to the new ecig langing page and both ran tests on the new links to make sure they were coded to track referrals from CX affiliates.

The modification of the 200 sale per day term: The court finds that the instant message conversation around modifying the 200 sale per day limit was equally definitive. CX asks about whether CX can refer 2000 referrals per day and asks for Smoking Everywhere’s “blessing.” In response, Smoking Everywhere says “NO LIMIT.” (caps in original). The court finds that CX’s suggestion of a 2000 sale per day limit was an offer of a new term. Smoking Everywhere’s response of “NO LIMIT” was a counter-offer which suggested a new term, which varied the terms of the original offer. CX accepts this counter-offer by signifying assent – i.e., saying “awesome!” Smoking Everywhere tried to argue that its counter-offer of “NO LIMIT” could have been referring to another term of the agreement (and didn’t necessarily refer to the sale per day limit) but the court does not buy this. Smoking Everywhere was unable to come up with a credible explanation of what other terms it could have been referring to.

The Signed Writing Clause: Smoking Everywhere also argued that a term in the insertion order which provided that it could only be “changed . . . by a subsequent writing signed by both parties” barred modification of the agreement by the exchange of instant messages. The court held that the instant message exchange was not oral (it was in writing) but it wasn’t signed by both parties. However, under Delaware law, conduct or statements could modify a written contract with a signed writing clause, and therefore, an unsigned writing could as well. CX changed its position in reliance of the modification (and based on Smoking Everywhere’s statements) by agreeing to pay its downstream affiliates for referrals. In these circumstances, Smoking Everywhere was estopped from asserting the signed writing clause as a defense.

Did the Vice President of Advertising Have the Authority to Bind Smoking Everywhere: Smoking Everywhere also argued that Nick Touris, the VP of advertising – who engaged in the instant message conversation with CX – did not have the requisite authority to bind Smoking Everywhere. The court held that Touris had apparent authority to bind Smoking Everywhere, and CX reasonably relied on this authority. There was plenty of indicia of Touris’s authority: (1) he was the VP of marketing; (2) he negotiated the insertion order; and (3) he personally implemented the URL change. Smoking Everywhere argued that Touris informed CX that Touris could not get agreements signed without the approval of Smoking Everywhere’s president, but Smoking Everywhere failed to come through and provide solid evidence on this point. Touris testified on the final day of trial that CX was aware that Smoking Everywhere could not enter into agreements without the permission of Smoking Everywhere’s president, but the court was concerned about “the comportment of [Touris]” and the fact that the testimony was procured at the request of Smoking Everywhere’s counsel, after he requested a recess during closing argument.

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From the practitioner’s standpoint, this looks like a significant ruling (or at least a good reminder that informal communications can modify written agreements). Written contracts are the currency of business dealings, and as a standard term, written contracts contain provisions that say they cannot be modified without a signed writing (signed by authorized representatives). Business representatives increasingly engage in informal communications and most people would reduce any later agreement to a writing in the form of an addendum. Here, the parties did not do that, and in the short time after the conversation in question, CX acted in reliance of the modification, and as a result Smoking Everywhere ends up with a whopping judgment against it. Yikes!

I’m guessing there is a body of case law to the effect that email exchanges can effect a modification of a signed contract, but this case is a useful reminder that even more informal communications such as instant message conversations can do the same.

Smoking Everywhere may appeal, and a footnote from the court’s order indicates that its ultimate ruling on the no modification without a signed agreement clause came as a surprise to counsel for Smoking Everywhere, but the larger takeaway from the case (regardless of how it resolves) is that informal exchanges can result in the modification of written agreements.

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Eric’s comments:

It doesn’t get more awesome than to have a contract counter-offer given a million dollar consequence through an IM saying, in total, “awesome!” Well, maybe it would be more awesome if he had scribbled the word “awesome!” on a bar napkin while he was high as a Georgia pine. (See Lucy v. Zehmer).

It’s standard for contracts to restrict oral amendments. It’s also standard for business partners to “talk” using email, IM, text messages, Twitter @replies, comments to Facebook status reports, etc., etc. The default rules should be that all of these electronically-mediated communications qualify as writings. (But see John O’s post on an odd case from last summer). If you fear the legal effects of these communications, you could try to restrict contract amendments to terms printed on a piece of paper mutually signed in ink. But I think lawyers are fighting an uphill battle trying to denigrate the legal effect of these electronic communications. They are an integral part of the relationship, and there’s not much we as lawyers can do to change that.